Chapter Three Accounting for Merchandising Businesses © 2015 McGraw-Hill Education.

Comparative Income Statements 3-2

Allocating Inventory Cost Between Asset and Expense Accounts Cost of Goods Available for Sale Merchandise Inventory (Balance Sheet) Cost of Goods Sold (Income Statement) 3-3

Perpetual Inventory System Inventory account is adjusted perpetually (continually) throughout the accounting period. Inventory increased for each item purchased Inventory decreased for each item sold 3-4

Event 1: JPS acquired $15,000 by issuing common stock. 1.Increase assets (cash). 2.Increase equity (common stock). Asset Source Transaction Event 2: JPS purchased merchandise inventory for $14,000 cash. 1.Decrease assets (cash). 2. Increase assets (merchandise inventory). Asset Exchange Transaction 3-5

Event 3a: JPS recognized sales revenue from selling inventory for $12, Increase assets (cash). 2.Increase equity (sales revenue). Asset Source Transaction Event 3b: JPS recognized $8,000 of cost of goods sold. 1.Decrease assets (merchandise inventory). 2. Decrease equity (cost of goods sold). Asset Use Transaction 3-6

Event 4: JPS paid $1,000 cash for selling expenses. 1.Decrease assets (cash). 2.Decrease equity (selling expenses). Asset Use Transaction Event 5: JPS paid $5,500 cash to purchase land to locate a future store. 1. Decrease assets (cash) 2. Increase assets (land). Asset Exchange Transaction =Liab.+ Cash + Land = + Common Stock + Retained Earnings Revenue - Expenses = Net Income Cash Flow (5,500) + 5,500 = n/a = (5,500) IA Assets Stockholders' Equity Inventory n/a

Financial Statements 3-8

Event 2: JPS purchased merchandise inventory on account with a list price of $11, Increase assets (inventory). 2.Increase liabilities (accounts payable). Asset Source Transaction Event 1: JPS borrowed $4,000 cash by issuing a note payable. 1.Increase assets (cash). 2.Increase liabilities ( notes payable). Asset Source Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow 4,000 + n/a + = = Assets Stockholders' Equity + + n/a Land + + Notes. Pay 4,000 n/aFA4,000 n/a =Liab.+ Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow n/a ,000 = + n/a + - = Assets Stockholders' Equity + + n/a Land Notes pay n/a 3-9

Event 3: JPS returned some of the merchandise purchased in Event 2. The list price of the returned merchandise was $1, Decrease assets (merchandise inventory). 2.Decrease liabilities (accounts payable). Asset Use Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow n/a + + (1,000) = + n/a + - = Assets Stockholders' Equity + + n/a Land Notes pay n/a Event 4: JPS received a cash discount on goods purchased in Event 2. The credit terms were 2/10,n/30. 1.Decrease assets (merchandise inventory). 2.Decrease liabilities (accounts payable). Asset Use Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow n/a + + (200) = + n/a + - = Assets Stockholders' Equity + + n/a Land Notes pay n/a 3-10

Event 5: JPS paid the $9,800 balance due on the account payable. 1.Decrease assets (cash). 2.Decrease liabilities (accounts payable). Asset Use Transaction Event 6: The shipping terms for the inventory purchased in Event 2 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise. =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow (9,800) + n/a + = (9,800) + n/a + - = (9,800) OA + + n/a Land Notes pay n/a =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow (300) + n/a = + n/a + - = (300) OA + + n/a Land Notes pay n/a 1. Decrease assets (cash) 2. Increase assets (inventory). Asset Exchange Transaction 3-11

Event 7a: JPS recognized $24,750 of revenue on the cash sale of merchandise that cost $11, Increase assets (cash). 2.Increase equity (sales revenue). Asset Source Transaction =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow 24,750 + n/a + = ,750 - n/a = 24,750 24,750 OA + + n/a Land Notes pay n/a Event 7b: JPS recognized $11,500 of cost of goods sold. 1.Decrease assets (merchandise inventory). 2.Decrease equity (cost of goods sold). Asset Use Transaction =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow + n/a + = + + (11,500) - 11,500 = (11,500) + + n/a Land Notes pay n/a (11,500) n/a 3-12

Event 8: JPS incurred $450 of freight costs on inventory delivered to customers, FOB Destination. 1.Decrease assets (cash). 2.Decrease equity (transportation-out). Asset Use Transaction =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow + n/a + = + + (450) = (450) + + n/a Land Notes pay n/a (450)n/a (450) OA 3-13

Event 9: JPS paid $5,000 for selling and administration expenses. 1.Decrease assets (cash). 2.Decrease equity (selling and administration exp.). Asset Use Transaction =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow + n/a + = + + (5,000) - 5,000 = (5,000) + + n/a Land Notes pay n/a (5,000)n/a (5,000) OA Event 10: JPS paid $360 for interest expense. =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Rev-Exp= Net Income Cash Flow + n/a + = + + (360) = (360) + + n/a Land Notes pay n/a (360)n/a (360) OA 1.Decrease assets (cash). 2.Decrease equity (interest expense). Asset Use Transaction 3-14

Event 11: JPS took a physical count of its inventory and found $4,100 of inventory on hand. 1. Decrease assets (inventory) 2. Decrease equity (loss on inventory shrinkage). Asset Use Transaction Assets = Liab.+ = + Revenue-Expenses= Net Income Cash Flow (500) n/a -500=(500) Stockholders' Equity (500) n/a 3-15

Event 12 : JPS sold the land that cost $5,500 for $6, Decrease assets (land) 2. Increase assets (cash) Asset Exchange Transaction =Liab.+Assets Stockholders' Equity Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Ret Earn Gain-Exp= Net Income Cash Flow + n/a + = = + + (5,500) Land Notes pay n/a 6, n/a 6,200 IA 3-16

Event 1a: JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/10 n/30. The merchandise had cost JPS $4, Increase assets (accounts receivable). 2.Increase equity (sales revenue). Asset Source Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Notes Pay + Com. Stk. + Retained Earnings Revenue - Expenses = Net Income Cash Flow n/a + 8,500 + n/a = + + 8,500 -n/a= 8,500 n/a Assets Stockholders' Equity Event 1b: JPS recognized $4,000 of cost of goods sold. 1.Decrease assets (merchandise inventory). 2.Decrease equity (cost of goods sold). Asset Use Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Notes Pay + Com. Stk. + Retained Earnings Revenue - Expenses = Net Income Cash Flow n/a + + (4,000) = n/a + + (4,000) n/a-4,000 = (4,000) n/a Assets Stockholders' Equity 3-17

Event 2a: The customer in Event 1a returned inventory with a $1,000 list price that JPS had sold. The merchandise had cost JPS $ Decrease assets (accounts receivable). 2.Decrease equity (retained earnings). Asset Use Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Note Pay + Com. Stk. + Retained EarningsRevenue-Expenses= Net Income Cash Flow n/a +(1,000) + n/a = + + (1,000) -n/a=(1,000) n/a AssetsStockholders' Equity Event 2b: The $450 cost of goods sold is returned to inventory. 1.Increase assets (inventory). 2.Increase equity (retained earnings). Asset Source Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Note Pay + Com. Stk. + Retained EarningsRevenue-Expenses= Net Income Cash Flow n/a = n/a n/a -(450)=450 n/a AssetsStockholders' Equity 3-18

Event 3: JPS collected the balance of the account receivable from the customer that purchased the goods in Event 1a. The discount was 1/10, net 30. Payment is received within the discount period. 1.Decrease assets (accounts receivable). 2.Decrease equity (retained earnings). Asset Use Transaction =Liab.+ Cash + Accts. Rec. + Inventory = Accts. Pay + Com. Stk. + Retained Earnings Revenue - Expenses Net Income Cash Flow 7,425 + (7,425) + n/a = = 7,425 OA Assets Stockholders' Equity =Liab.+ Cash + Accts. Rec. + Inventory = Notes Pay + Com. Stk. + Retained Earnings Revenue - Expenses = Net Income Cash Flow +(75) + n/a = + + (75) -n/a=(75) Assets Stockholders' Equity n/a 1.Decrease assets (accounts receivable) 2. Increase assets (cash). Asset Exchange Transaction Event 3 ALT1: The collection occurs before the discount period has expired (within 10 days from the date of the sale). 3-19

Common Size Income Statements * Since JPS did not offer sales discounts or have sales returns and allowances during 2014 or 2015, the amount of sales revenue is equal to the amount of net sales. We use the term net sales here because it is more commonly used in business practice. Percentages do not add exactly because they have been rounded. 3-20

Periodic Inventory System No entries made in Inventory account during period Cost of goods sold determined at end of period 3-21

End of Chapter Three 3-22